Tornado warning
DeFi advocates are also facing off against regulators on a separate front, where the main issue at hand is privacy. Nowhere are the stakes higher for the future of the decentralized financial systems than in the case of Tornado Cash.
Like Uniswap, Tornado Cash is a set of smart contracts on the Ethereum blockchain. It lets users deposit cryptocurrency in a pool of other people’s digital money and then withdraw it to a different address, while using advanced cryptographic techniques called zero-knowledge proofs to ensure that there is no public link between the deposit address and the withdrawal address. That means the money is no longer tied on the blockchain to the user’s past transactions, which makes it harder to trace and provides a layer of privacy.
In August, the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 45 Ethereum addresses associated with the platform, effectively banning Americans from using it and decimating its user base. The agency said it took the action because Tornado Cash had been used to “launder” billions of dollars, including hundreds of millions stolen by North Korean state-sponsored hackers.
OFAC has sanctioned blockchain addresses associated with foreign individuals before, but never has it sanctioned a smart contract. It also doesn’t have the authority to do so, argues Peter Van Valkenburgh, director of research at Coin Center, a policy advocacy group in Washington, DC. As Coin Center points out, many of the contracts OFAC sanctioned cannot be modified, blocked, or turned off by any of Tornado Cash developers; they exist independent of human intervention.
While OFAC has the legal power to sanction people and certain foreign entities, it can’t ban Americans from using a tool like Tornado Cash, Van Valkenburgh says: “The statute that gives OFAC power was never intended by Congress to be used to tell Americans which software tools they can and cannot use.”
Coin Center has filed a lawsuit against the Treasury Department aimed at reversing the sanctions and blocking the Treasury from “enforcing against ordinary their self-evident and basic rights to privacy.” Besides arguing that OFAC does not have the authority to ban software tools, Coin Center also argues that the sanctions violate the Constitution. The popular US crypto exchange Coinbase is funding a similar lawsuit against the Treasury.
After the sanctions came down, GitHub removed the project’s source code, and the project’s website, tornado.cash, was taken down. Separate from OFAC’s actions, Dutch authorities detained one of Tornado Cash’s developers, Alexey Pertsev, and a prosecutor has accused Pertsev of facilitating money laundering.
Pertsev was one of Tornado Cash’s founders. But like most crypto projects, Tornado Cash is open source and relies on a loosely affiliated collective of contributors. Another cofounder, Roman Semenov, did not respond to a request for a comment.